Jason Burack Discloses Shocking Chinese Insights!
The Wall St for Main St macro expert shares what is really happening in China.
He breaks down the Asian Tiger Crisis, why their dollar reserves are so important, how is their manufacturing and real estate sector, their future, and much more!
We also talk about the federal reserve, the markets, the dollar milkshake theory, currencies, and the future of the dollar.
I have almost 1,000 people paying for my content now. I worked very hard for this over the course of many years working to improve. Luck is where preparation meets opportunity. I turned my life around in 18 months. It takes a lot of hard work & discipline w a little luck.
— Jason Burack (@JasonEBurack) May 5, 2020
Jason truly helps us understand what’s happening behind all the noise and translates many relevant topics.
Jason Burack’s Background
George: All right guys, it gives me a great deal of pleasure to bring someone to The Rebel Capitalist Show that I have a tremendous amount of respect for.
A good buddy of mine on Twitter, he does an awesome job breaking down the macro environment.
His name is Jason Burack. Jason, welcome to The Rebel Capitalist Show.
Jason Burack: Thank you George. I love your show. I watch as many as I can.
I mean I'm so busy making my own content but I do. I finished your cashless society video late last night.
George: That was a good one. People accuse me of having clickbait titles.
I said, “Look at that one. If you're not terrified after that video, then I don't think you know the history of central banks or of governments, that's for sure.”
For my viewers who don't know your backstory Jason, it's fascinating and you're a real pro, you've been at this long a time although you're a pretty young guy.
Can you fill us in there?
Jason Burack: Yeah, I sound like I'm 25 still but I'm actually closer to 40 now, so I guess it's kind of … This is kind of a blessing.
But my journey really started in 2007, I started reading some basic Warren Buffett value investing investors books.
I dropped out of law school, I got a job as a stockbroker, and unfortunately through no fault of my own just bad luck, bad timing, I was a stockbroker at a firm during the 2008 financial crisis while everything was crashing.
George: Oh wow.
Jason Burack: Yeah, and my dad had regular money at another major stockbroker, regular stockbroker, and his broker wouldn't call him back on the phone, wouldn't answer.
For months he wouldn't get an answer about what to do and he lost a lot of money.
My grandma, before she passed she had inherited a substantial amount of money inheritance from my grandfather, who had passed a couple years before.
Unfortunately after my grandmother passed, my dad and my mom got their share of the inheritance, and we're going through it, and unfortunately my grandmother had been fleeced for hundreds of thousands of dollars in mortgage-backed securities and real estate investment trusts and other toxic garbage.
Bad bank stocks, preferred shares and bank stocks and a lot of these things went down 90% or more in value, some of them collapsed.
George: Wow. Wow.
Jason Burack: So I wanted answers. I wanted answers. I didn't like my job in the regular financial industry because it was just a sales job so I wanted to learn and I started on my own path.
There's a lot of painful growing pains. I interviewed over 500 different experts, people like you with different backgrounds in the oil market.
I worked in different jobs in the financial industry. I was an oil analyst for my day job also covering dividend stocks and some other small-cap stocks for a day job in the past.
And then I've been hired to write research reports in the past for high net worth clients worth seven or eight figures.
George: Okay, great stuff. Brings us up to speed here.
One thing that I'm personally curious about, Jason, is I know you really lean toward the Austrian school and you've got a libertarian slant to you:
How did that come about?
Was that as of 2008 or were you leaning that direction before?
What was the catalyst?
Jason Burack: I always liked capitalism and I always dreamed of owning my own business but, after 2008 I saw all the rules changes and all the crazy things that the federal government and the central bank and the banks were doing.
And getting away with and the bailouts and I just said, “This is morally wrong. None of this is fair. The people on Main Street were hurting.”
I was a regular person on Main Street, I was working in the financial industry as a lowly investment advisor representative or stockbroker and I was just a salesperson and they weren't telling us.
So we didn't know and I wanted answers, so I found Peter Schiff's work. That was the first person that woke me up. He red-pilled me, if you want to use that phrase.
From there I started reading like Economics in One Lesson, Mises Institute, and then I started interviewing people, other experts, and asking them a lot of hard questions. So questions.
Mostly just questions and I take a lot of time to write questions. I have a legal pad and I spend at least 20 or 30 minutes writing out questions.
I try to do this very, very thoroughly when I do interviews and I've done over 500 and it was just mostly questions that I myself wanted answered, and then I'd listen to the interviews later.
This was in addition to, besides interviewing a bunch of people, also reading over 500 books about business, investing, entrepreneurship and doing interviews and that's why I think over 10 years, it's over 10 years now, that's why I've improved so much.
How Broken Is Our Economy?
George: Yeah, well you definitely have an incredible grasp of macro. That is for sure.
I think you have a much more detailed grasp of it than I do. I kind of understand how things work and put the pieces of the puzzle together, but you really understand it from a bottoms-up and a tops down.
I know before we were recording you were talking about the global economy and how it was really kind of sick, for lack of a better word, prior to the pandemic that we're dealing with right now.
Can you kind of dive into the research and kind of the facts and the data?
I know you've got a couple of articles that we're going to review to show my viewers just how broken the economy was prior to this and therefore may be why it might not be a V-shaped recovery.
Jason Burack: Sure. The U.S. economy had better economic data than pretty much every other single country, especially all of the major export giants like Germany and South Korea by an enormous long-shot.
And there was a lot of problems in China and when China has a lot of economic problems, emerging markets that export to China that have enormous amounts of exposure to commodities, so base metal, energy, those emerging markets, the companies in those emerging markets don't just get sick, they get deathly sick.
The last 12 to 18 months, the export data from South Korea, which 50% of their GDP is exports…
I was doing interviews with my friend Adam, who looks at these leading economic indicators out of South Korea and we were discussing this on my YouTube channel for interviews over the last 18 to 24 months.
We're going through this data and it was just getting worse.
So South Korea was in a recession well over 12 months ago, Germany was in a recession all of 2019, and the economic data long before China got the global pandemic, the economic data in China was really, really bad.
Now I have contacts as you know inside mainland China.
I have a really good friend that was trapped inside Wuhan for over 50 days, quarantine and lockdown.
So I was getting a lot of detailed reports early to mid-January about what was going on.
But I also have other contacts that were sending me some photos and analysis including how factories in Fujin…
In Fujin there is a lot of shoe factories like Nike and Reebok and Adidas, how some of those factories were literally alternating months on and off.
There was a lot of red flags with the Chinese economy for over 12 months.
I would say, the Chinese economy was deteriorating, was contracting violently, way way more than the official Chinese economic data.
And then China also had the African swine flu, prior to the global pandemic, and the African swine flu was devastating the pork population in China.
Some estimates I've seen, affected 70% or more of their pork population. And so there was really, really bad stagflation in the Chinese economy on rent prices and also food prices.
The Chinese economy was in serious, serious problems.
You also had almost a year ago, it was 11 months ago, you had Baoshang Bank, the Chinese version in my opinion, of the repo madness that we had here in September.
So Baoshang Bank was really the big, big warning sign because within two or three months you had at least six banks officially, that China acknowledged that had to be bailed out or merged.
The bailouts that were going on, I did a video on this on my YouTube channel, George, not sure if you saw it last year, it was called China's Very Dangerous Fiat Currency and Credit Situation.
The types of bailouts that the Chinese economy was doing for over 12 months really before the global pandemic was absolutely enormous.
The repo spikes inside China started in January 2019 and by the summer of 2019, you had just insane amounts of different types of bailouts inside the Chinese economy.
Jason Burack: The craziest bailout that I saw was for China Construction Bank which is one of the two largest state-owned enterprise banks in China, and the Chinese government and the People's Bank of China.
Their central bank, ordered this enormous bank to bail out Hunan Province at the tune of $300 billion over I think a five-year span.
That would be the equivalent if here in the United States, if the federal government or the Federal Reserve asked J.P. Morgan to bail out the state of Illinois.
George: Yeah, I was going to say, it sounds like they're bailing out an entire state.
Jason Burack: Yeah, it's a province, it's a very large province so it was absolutely enormous.
There were reports from Michael Pettis and Leland Miller of China Beige Book that a lot of …
The New York Times ran a story on this I think in August 2019, it was extremely detailed about many provincial and local government employees in China that were not being paid on time for months.
Even state-owned enterprises were not paying their bills on time.
So the Chinese economy… really the global pandemic was the last thing that they needed because it was already in peril for I would say 12 months at least.
But China's problems started before that. They started really in 2015 and 2016.
Kyle Bass has talked about this a lot with how their official reserves dropped a trillion dollars in only 12 months.
George: Now you're talking about their dollar reserves.
Jason Burack: Yes. Yes.
George: Okay Jason, before you go into this, just for the viewers.
Can you explain why the Chinese dollar reserves are so important to China?
Because if I'm just an average Joe, I'm like, “Okay, well so what on China, I don't really deal in dollars.
What's the difference between having $4 trillion U.S. dollars and $2 trillion?
I mean it's nice to have the extra money but am I really screwed if it goes down by $2 trillion?”
The Asian Tiger Crisis
Jason Burack: Okay, so most foreign exchange reserves or sovereign wealth funds, sovereign wealth funds are used for investments normally, but foreign exchange reserves are normally used to protect the exchange rate of the currency.
Like what happened in the Asian Tiger Crisis. So the Asian Tiger Crisis, you had … I'll just give a very quick summary.
You had all these Asian countries that had dollar pegs, and so they had run up too much debt and the currency traders were ….
Temporarily they had offered higher interest rates for foreign investors, foreign direct investors to come in but this was hot money that could leave.
The debt problems in these Asian countries started to balloon and then the hot money, so net capital outflows, started leaving.
So then the government finances became in peril and the currency exchange rate started to really wobble and the Fed at that point had to step in.
That's when the currency swaps, the central bank level currency swaps started but they were much, much smaller back then.
They started I think initially … James Turk has talked about this in his latest book with John Rubino that the original currency swaps were for like $8 billion, $10 billion from the Asian Tiger Crisis in Mexico.
At that point, when foreign banks blew up and the Wall Street banks, or hedge funds had leverage currency trades, or foreign government bond trades that went bad, the Fed has always been willing to step in and do these currency swap lines.
The foreign governments got in serious, serious trouble with the dollar pegs because they ran out of foreign exchange reserves to defend the pegs.
US vs China Trade War Update: Trump Giving China A Break From More Tariffs To Buy Food? https://t.co/3U4yu8K9Cr https://t.co/3U4yu8K9Cr
— Wall St for Main St (@WallStForMainSt) July 1, 2019
George: That's the bottom line.
I think is that if you're XYZ country, and you are not on the dollar, but you've got your currency pegged to the dollar, if that goes against you, you need dollars to defend your currency.
Because you need dollars to go to sell into the market to buy back your currency to keep that peg. Is that correct?
Jason Burack: Yes.
George: Yeah, okay.
Jason Burack: Yeah, dollars are also earned through global trade, but what you've seen with a lot of the emerging markets is they've been moving their global trade away from the U.S. and more towards China.
So China normally wants to do a lot of global trading in their own currency, but then you've had a lot of these emerging markets …
Since the dollar got low, you've been talking about this extensively in your interviews and videos, when that dollar got low, that's when those emerging market countries, they got greedy.
They used to leverage and other stupidity and they thought that that trend would continue, so they borrowed in dollars even though they were trying to do trading outside of the dollar with China.
George: Right, because they could get dollars at a very low-interest rate.
A lot lower interest rates than they could borrow in their own currency or XYZ currency.
Jason Burack: Yes. Yes, but then they got hit, they got hit with a bunch of unexpected headwinds.
So the headwinds were the commodities bear market started, so that means that a lot of these commodity export businesses inside these emerging markets got into trouble.
George: Because they were getting fewer dollars?
Jason Burack: Well they had dollar-denominated debt and the commodity prices were lower, yes.
So ultimately fewer dollars.
The Chinese Dollar Reserves Crisis
George: Yeah, yeah, yeah, because their revenue is for these commodities that are denominated in dollars.
Therefore, if the commodity price goes down that means their dollar revenue goes down.
But yet their dollar debt stays the exact same. Okay, so I'm totally clear on this. I think the viewers are now as well.
So going back to China, you said last year, or was it the year prior, where Bass was saying that they had a big problem because their dollar reserves went down by like a trillion dollars in just a matter of months.
Jason Burack: This article, which is from Reuters – Major China State-owned banks seen supporting Yuan after fresh fall from August 22, 2019, is …
This one's more up to date about what Chinese banks were doing.
This is the more recent intervention with the Chinese state-owned banks that were ordered by the Chinese government, and the People's Bank of China to start doing more forward dollar swaps to help with their foreign exchange reserves and defend their currency exchange rate.
This is when the Chinese yuan to the dollar exchange rate went above seven.
They got control of the exchange rate, but I think it's important for your listeners to understand how the Chinese economy has changed a lot in the last 10 years in terms of fundamentals.
About 10 years ago, or 12 years ago, I would have agreed with everything Peter Schiff and Jim Rogers said about the Chinese economy because the debt levels in the Chinese economy, the credit levels were very, very small.
I believe it was only about $5 trillion in total credit and they had $4 trillion in reserves.
This was a much smaller economy but there was a high savings rate and it wasn't crazy with the credit bubble.
Now you fast-forward to what has happened, and the amount of credit inside the Chinese economy and a lot of it is based on high real estate prices as collateral.
So you have very similar problems to what happened to the U.S. real estate market. The U.S. real estate bubbles, from 2002 to 2007.
In fact, a lot of pro-China people, and people inside China I've spoken to, have told me for the last two years that Chinese real estate prices won't fall.
It's the attitude, the perception, the government won't allow it.
The Chinese government at the provincial level and at the national level has canceled …
I don't know the exact amount, but certain real estate sales that would indicate that prices were falling, and one of China's largest real estate developers, Evergrande Group, just had enormously horrible earnings.
They had -50% on profits, and the Chinese economy, for the first time that I've ever seen the data, Tavi Costa, the hedge fund manager from Prescott Capital, dug into the Chinese data from the China Bureau of Statistics.
What it has shown is that this first quarter for 2020, the amount of real estate investment in China collapsed.
This is the first time on record of any data set since 2001 that real estate investment in China is not positive. It dropped by 16%.
Jason Burack: The reason why that's important for your listeners is you have a credit bubble in China.
You have a banking system that is more than twice as large as the U.S.'s banking system, and that banking system, all the collateral, all the assets, is based on high real estate prices.
There's a great book out by Dinny McMahon, this is a must-read for your listeners who want to understand this, it's called China's Great Wall of Debt.
Thanks @Umesh_Desai for such a lovely review! https://t.co/j5h6Y0ppHT
— Dinny McMahon (@DinnyMcMahon) February 5, 2020
He speaks fluent Mandarin, he lived there for 10 years, I have interviewed him on my channel last year in 2019.
I don't think he's allowed back in the country because he criticized the country, but the book is phenomenal.
He details how a lot of these Chinese factory owners, over the last five years, including stories, individual conversations with some of them, that didn't know anything about real estate.
But they couldn't make any money at any of their manufacturing or factory businesses, and so they pledged their factories as collateral.
Even though they were still running the factories and then went into real estate construction or real estate speculation and real estate business.
So a lot of the Chinese economic growth, according to Jim Chanos, about 25% depending on how you measure it, of China's GDP is based on speculative real estate construction.
When you add that with the China's export economy now, and how a lot of the higher-end consumers in the European Union, in the U.S. that China normally exports to, are not going to be consuming as much, that 65% of the Chinese GDP is in peril.
A Grim Future For The Chinese Economy
George: Yeah, that makes a lot of sense.
When you say the Chinese are not exporting as much, and that's a huge driver for their economy, it sounds like the real estate is internal.
Do you see that being a longterm issue or a temporary issue?
The reason I'm saying that is because right now with the … We'll call it the Cerveza sickness, there's an attitude, there's a narrative out there towards de-globalization.
Like why are we dependent on China for our face masks? As an example.
I'm not saying … Obviously there's pros and cons to globalization, but there's a push for that and you got all these supply chains that are being disrupted.
Do you think this is a longterm structural issue, and if so, is that going to really be damaging to the Chinese economy, not just over the next six months, but potentially over the next five, ten years?
Jason Burack: Yeah, so it depends because a lot of Chinese manufacturers were not doing well prior to President Trump putting on the tariffs.
So the tariffs that President Trump put on just exacerbated the problems, made things even worse.
They turned very marginal. Some Chinese manufacturers went from very marginally profitable into enormous losses.
That meant people were looking around for how to make money, which meant that even more people were going to go into that shadow banking system, wealth management products, get shady loans and get into real estate and construction because that was still the best business in China.
So you had the credit bubble, you had how much real estate and construction was going on in China, and how much the Chinese economy is dependent upon that.
Kyle Bass has said that there is over $50 trillion in credit now, dollars worth of credit in the Chinese economy.
Also, the amount of dollar-denominated debt too, inside China's economy.
China was one of the trading partners, I think the largest major trading partner, that did not get currency swaps in the press release.
But back to your question. I wanted to put those details out there first. So back to your question.
Because how many Chinese manufacturers were hurt by the tariffs, and there is enormous xenophobia in China now too, especially anti-American.
It's changed a lot, the mentality towards trading, and trading with foreigners now in China.
But now back to your question, it really depends, George, on how many factories leave China in the next two to seven years.
Larry Kudlow: My Story…and God's Gracehttps://t.co/Y08j4JZdAH
— Larry Kudlow (@larry_kudlow) March 31, 2018
Larry Kudlow has talked about just creating more currency units and paying the bills for all these manufacturers to come back to the U.S.
Now there is a lot of tax and regulatory hurdles with different cities and states that I don't know if that's even possible.
I mean the currency can be printed, I don't know how all the regulatory red tape, how quickly that can be done.
But it just depends on how many actual factories leave China in the next two to seven years.
I think it's really clear that relations have changed a lot with the U.S. and China in just the last couple years, especially once President Trump got elected because the Chinese were not prepared.
I interviewed Tony Nash on my channel, he's a global supply chain expert.
Government shuts economy. Manufacturing indexes fall. Yawn. Sad, but yawn. https://t.co/AeLf7DXTOY
— Tony Nash (@TonyNashOnAsia) May 26, 2020
He worked and lived in Asia for 15 years, and he was doing presentations with Chinese government officials after Trump won, but before he put the tariffs on, telling them that Trump's going to put the tariffs on and they didn't believe him.
They said, “Why would Trump punish us when all these other countries were doing it too?”
So, It really depends on how many factories actually leave China. I think they will, some of them will, in the next two to seven years.
It depends, but I think it's really clear that the U.S. and China do not play well together.
To use like the old kindergarten analogy, if they can't play nice together, maybe they shouldn't play at all.
The Beaten Down Chinese Manufacturing Sector
George: Yeah, that makes sense. Just going back one moment, so I'm crystal clear.
When you say that the manufacturing sector in China was really taking a beating, not just now, but over the last few years.
Why is that?
Is it because they overbuilt their manufacturing, or is that because the exports went down because the global demand went down and, therefore, maybe it's an indication that the world economy is sick and not just the Chinese manufacturing sector?
Jason Burack: Yeah, I think it's a combination of factors and you mentioned few of them.
Labor costs in China have gone up over 500% in the last 20 years.
China is no longer the lowest cost, so yes, the salaries are cheap compared to what a factory owner here in the U.S. would be paid, but the labor costs are up substantially.
So if you want to talk for cheaper manufacturing labor, you're looking at India, Vietnam, Bangladesh, Mexico, you're looking at other countries like that instead now.
George: Got it. Got it. Got it. Okay.
Jason Burack: It's all these factors, and then Trump put on the tariffs, and then also with the real estate market that a lot of these manufacturers were not able to export goods.
The demand for some of them had dropped because there was too much misallocation of capital.
So, people like Peter Schiff, I respect Peter Schiff a lot, but I personally think he's just wrong on China.
You can, in my opinion, misallocate capital with governments to factory owners because I've heard of many, many stories.
Leland Miller of China Beige Book has documented this extensively in his interviews on Real Vision TV and elsewhere along with other contacts I've spoken to.
CBB's Scissors joins #Bloomberg @Markets "The Close" to discuss how the WH & Congress view #China's Article 23 push in #HongKong & what the potential implications are for #Taiwan@romainebostick @scarletfuhttps://t.co/WZ4utj39TR pic.twitter.com/ecbd2yMQDD
— China Beige Book (@ChinaBeigeBook) May 25, 2020
Whether it's Dinny McMahon or Tony Nash, in my interview that I did with him in 2019, of Chinese factory owners getting bailed out.
So there is no civil unrest.
So the Chinese government prints up the capital, that's misallocation of capital there too, and is somewhat deflationary because a lot of factory owners are producing goods and the demand is falling and inventory levels are rising, it's also wasteful.
It's wasteful to build cities and it's also wasteful to subsidize.
George, I try to criticize all governments, unfortunately some people criticize me. They call me a China basher.
I'm just trying to do a balanced analysis that there are problems with the Chinese economy that a lot of people have not spoken about.
Repo Market Problems That Started on September 17, 2019
George: Yeah, okay. It makes total sense. I'm looking at the article that you referenced before.
Do you want to move on to a different article?
I'm just looking at the one that says Major China State-Owned Banks Supporting Yuan.
Jason Burack: Okay, that article was from the Chinese banking crisis that was unfolding after Baoshang Bank in May 2019.
And then we had Bank of Jinzhou and then we had Hang Seng Bank and we had a few other banks of various sizes.
But the amount of different bailouts, I did a video on this, a couple of videos on this on my YouTube channel.
What China did is they were worried again about their foreign exchange reserves dropping, so they went in and used the derivatives, again, and this was involved with the repo.
I said on my YouTube channel many times that there were about four or five major problems in the repo market in September, and this was a major part of the international repo problems.
All these forward dollar swaps that China, Brazil, and these other emerging market countries were using dollar funding markets outside the U.S. This was part of the dollar shortage.
This was the international part. I mean you've documented the U.S. repo problems extremely well so, I don't think I need to cover that, you and your guests have done that superbly.
So outside of the United States, there were huge repo issues just like we were having them inside the United States in that September 17 date range?
Jason Burack: Yes, they were going into dollar funding markets for repo, to get dollars, to deal with those forward dollar swaps because the positions of those were so large.
They did not want to drain all of their foreign exchange reserves too rapidly.
But, ultimately, that's what's been happening and why you're seeing currency exchange rates for a lot of these different countries, Brazil, Australia and others.
Now obviously there's other factors, but the margin call, one of the main reasons for the currency exchange rates is the dollar-denominated debt, but also the forward dollar swaps.
This is something that a lot of financial professionals, I think, only have part of the puzzle.
So pretty much all the ones I've … I respect all these other people, I just disagree a little bit.
You have the dollar-denominated debt which everyone says is like $12 trillion, $13 trillion, but the other major amount is these forward dollar swaps.
But your dollar liabilities, these are derivatives, derivatives are extremely dangerous, especially if you're a hedge fund using leverage to bet in the derivatives market like in 2008 with mortgage-backed securities and others.
But these forward dollar swaps, the size of them, according to this Olga Cotaga article, she worked her sources, she got amazing information in these articles.
These are two articles she put out in 24 hours, so I think these were very, very important and this was still as the repo crisis was unfolding.
Things calmed down a little bit in repo. She came out with this article called In Swaps We Trust: Disappearing Dollars Drive Currency Trading Dependence.
Looks like one of those pictures where they show how to extract a pimple pic.twitter.com/N0ALOlGjbt
— Olga Cotaga (@OlgaCotaga) May 21, 2020
In the third paragraph there is swap users had a scare in September when the U.S. Federal Reserve had to pump cash into markets as rates in the $2.2 trillion U.S. repo market spiked and spilled into foreign exchange swap markets sending the premium to borrow dollar shooting higher.
Jason Burack: This becomes a doom vortex loop because they have dollar-denominated debt, they have dollar liabilities in the tens of trillions.
In this article here, I think Claudio Borio, from the Bank of International Settlements he says it later in the article, the paragraph here, borrowing via swaps could amount to $14 trillion or more.
Claudio Borio, head of the Bank of International Settlements, monetary and economic department estimated.
So this margin call that we've had in the last four or five weeks, it's not just on the dollar-denominated debt, you have to add in the forward dollar swaps.
And then you're looking at, if you add up $12 trillion and $14 trillion, at least $26 trillion.
They may be underestimating things, because of the Bank of International Settlements, in their December 2019 global macro update, that came out I think December 8.
It was before the global pandemic was becoming widespread news, and causing all the other destruction in the global economy and the supply chain.
There were already problems as I think I've already documented.
The global pandemic only made things a lot worse but there were already a lot of problems.
By then, the margin call was $26 trillion.
When China Get A ‘Margin Call' What Will Happen?
When you talk about the margin call, can you unpack that a little for someone who might not understand the kind of finance lingo?
And if you're … Let's use China as an example where you've got … Let's just call it $10 trillion of debt that you have, let's just use the example of a mortgage.
Let's say China has a $10 trillion mortgage that they have to pay and their payments are, let's just call it the $10 million, or $100 million per month, and so they need these dollars to service that debt.
So if China gets a “margin call”, how does that actually play out?
What happens there, so we can just put it in like a household term so people totally get it?
Jason Burack: Okay, so this would be if you stop making payments on your credit card, the bad things that could happen.
Or you missed a mortgage payment or you couldn't pay off like the minimum amount. This would be the version of a margin call.
When the global economy is functioning normally, after the dollar was severed with gold, we basically had a dollar standard.
So when global trade was functioning normally, these companies were trading back and forth, American tourists were leaving the United States, and these foreign companies were earning their dollars.
But since the global pandemic started, that has come to a halt, so there is a cash flow problem, an enormous cash flow problem.
So you have collateral problem, you have assets turning into liabilities in some cases, and you have a cash flow problem.
George: Okay, okay. Got it, got it, got it.
So the bottom line is although most people that we see, even kind of some really, really smart people, on let's say Real Vision, they're talking about the $13 trillion of dollar-denominated debt that corporations and countries have outside the United States.
You're saying that “Hey guys, it's even more than that because there are all of these derivatives that are owned by entities outside the United States that are also denominated in dollars.
And if you add everything all together, we're up to $26 or almost $30 trillion that needs to be repaid, or at least needs to be serviced with very few dollars actually getting outside of the United States.
Jason Burack: Bingo.
That's why the Fed put in the global repo and that's why the dollar index is still at, when we're doing this interview, barely under 99.
Because like Brent Johnson says, and I agree with him about this, there is lots of demand for dollars to not default right away.
So these foreign companies or foreign governments do not default right away.
What Will Happen To The US Dollar?
George: Okay, so my next question for you, and you know Brent's work well.
Brent is basing his dollar milkshake theory on there being $13 trillion dollars, of let's say liabilities, outside the U.S. But, if you're saying it's $29 trillion, then you've got to be on Brent's side times 100.
You've got to be the dollar milkshake guy on steroids. But I know you're not! So, what are your cross-currents there, in your mind?
That makes you say, “well, although I totally get Brent's point, and I would take it a step further, I think there's twice as much of the dollar liability out there, but I still don't think, that would make, or potentially the dollar still won't go to 110 or 120 or 140 on the DXY?”
What's the counterbalance to that?
Jason Burack: It's actually really simple, and unfortunately in the world we live in, the roles are constantly changing, the goalposts are being moved.
It's like Charlie Brown trying to kick the football and Lucy pulls it all the time.
It's because President Trump, the Trump Administration, the U.S. Treasury and the Federal Reserve, will announce on maybe a daily basis new programs for bailouts, new programs to buy assets to try to devalue the dollar.
I really believe that when the dollar index hit 103, that was a full-blown panic move.
I honestly think, and Brent Johnson was going to be right, Raoul Paul of Real Vision was going to be right about this, but what happened was there was an enormous intervention.
The rules changed, global repo, so these foreign governments did not have to blow through all their reserves, dump their treasuries for dollars and the global repo market was the Fed's global repo bailout fund was established.
So how could the Fed stop this again? The Fed could announce, to try to weaken the dollar.
They are clearly watching the exchange rate for the dollar, and the dollar index, so they can't do, in my opinion, I don't think that they can do too much at once.
They're in a losing battle anyway. They're willing to do almost anything to weaken the dollar.
I think at some point they may, since we're already on the MMT, QE path, wipe all student loan debts if it means the dollar index is too strong.
They may announce that they're just going to wipe away all the student loan debts.
If things get bad enough, and you've talked about this, you've talked about the Plaza Accord, that's another rules change right there.
So all of a sudden, they have a meeting, right?
And they just decide, like in 1985 to devalue the dollar 50% because at that time I think Japan and Germany had similar problems to what's happening now.
So they had too much dollar-denominated debt, the fed wanted a weaker dollar because everyone is using Keynesian or Neo-Keynesian economics and mercantilism, they want to export with a weaker currency.
President Trump is tweeting about how the dollar. He tweets all the time about the dollar and how it's too strong.
He's been doing this for over a year now, so you know if he's saying this publicly you know it's being discussed privately in meetings with the Treasury Secretary and also with the Federal Reserve chairman.
The other major thing is I don't think that they will do this immediately.
They will try everything else maybe two or three times first, is if nothing else works, you go to what FDR did in 1934.
That's devaluing the dollar against gold. Now the central bankers do not want to do this.
This is the “nuclear option”, Jim Rickards has talked about this.
This will be saved for the last.
They will try everything else, they will throw everything including the kitchen sink at it, to try to prevent the dollar index from getting to those levels that Brent Johnson and Raoul Paul are talking about, because in that scenario you're going to have even more rapid defaults than you're having now.
George: Inside or outside the United States?
Jason Burack: I think outside the United States but then that would be like subprime affecting prime.
So that would come here because you have so many multinational corporations that are dependent on doing business outside the United States and also the global supply chain too.
That would affect that as well.
Will There Be A Plaza Accord 2.0?
So, if they do a Plaza Accord 2.0, what would the transfer mechanism be, to get the dollars outside of the United States?
If you're Jerome Powell, not that I'd wish that upon you Jason, but get that out of your mind…
Jason Burack: No thank you.
George: I'm sorry I said that.
Let's just say that we put you in charge of the Fed for a minute and I said, “Jason, your only job is to devalue the dollar or to bring the DXY down to 70.”
How do you do that in the shortest amount of time?
Jason Burack: I think the Fed is really perplexed why the dollar index is so strong because they've done so many.
You've documented this better than anyone, George, so many different alphabet soup bailout programs.
The bailout programs you're talking about, I speak with financial professionals and they don't even know some of them.
Like how the Fed circumvented the primary dealers to loan directly to some of these larger corporations.
The stuff in there is enormous and yet still the dollar index is strong. This is the problem the Fed has.
In my opinion, this is happening because of:
The amount of dollar-denominated debt
The dollar liabilities, these forward dollar swaps, are defaulting faster than the Fed can come up with new bailout programs.
And until that changes, the Fed can't weaken the dollar.
George: Can't they just say, “Okay, we're going to create … Call it $10 trillion” and go into the global FX market and we're just going to buy $10 trillion worth of different currencies, and bam.
Doesn't that drop the dollar or is that not enough or would that not work?
What do you think about that?
Jason Burack: In theory it should, but I mean Japan has been doing that too.
The problem is you have all these different countries trying to do it at the same time. That's the problem. They're all Japanified now, Japanification.
George: Oh, so you think if the Fed tried to do it, then the other central banks, the European Central Bank, and the Bank of Japan would see that and be like, “Okay, we've got you.
If you do $10 trillion, we're doing $10 trillion,” to make sure that the dollar doesn't go down?
Jason Burack: Yes. Yes. To make sure their currencies get weaker.
The other major problem is what Chris McIntosh says, I listened to most of both of those interviews, I didn't finish the second one yet, is that a lot of flight capital has come in here to the U.S. for the last couple years into the asset markets.
My newsletter is still free. Sign up for it at https://t.co/GbyqDZFIV6
— Capitalist Exploits (@capitalistexp) September 18, 2019
Because of the problems in the global economy that were already occurring, people were seeing the problems with these emerging market countries having problems with the commodities, bear market, the capital outflows, and exporting to China.
So a lot of flight capital has already come into the U.S, and there's not a lot of places for all this flight capital from professional managed money, professional bond fund managers, global pension funds to put all this capital.
There's only so many places these trillions and trillions can go, and the U.S. has benefited from this for the last couple years until lately.
And that's why I think from a historical reference standpoint, what we had including the stock market crash was similar to 1927-1929.
Now you have President Trump doing similar policy measurements to what Herbert Hoover and FDR are doing.
What's Going To Happen To The Stock Market?
George: That's not good.
Would you be on Brent's side as far as the stock market as well?
I mean everyone knows him from the dollar milkshake theory, but he also believes the stock market, the U.S. stock market, will continue to go up.
Not necessarily because of fundamentals, in fact, he's very bearish on the fundamentals, but just because of all the capital coming in because other major markets are worse than the United States?
Do you see that potentially taking the S&P up to where it was before, or do you think there's just no way, and all that capital is just going to stay in cash?
Jason Burack: I think it's really tough to say what the stock market will do.
My educated guess is, what happened after the 1929 crash and what happened in the 1970 stagflation, I think we'll get parts of both.
I think we'll get that until the fed figures out how to weaken the dollar, and figures out how to juice things.
The problem though is the real economy.
Brent has talked about money coming in, well, flight capital has already been coming into the U.S. for years now.
There have been enormous amounts of capital from professional bond fund managers, pension funds, and emerging market stock portfolio managers, so those guys have already left.
I have covered this on my podcast, and provided lots of articles and documented evidence that a lot of that capital over the last couple years has already left those areas.
China has enormous capital controls to prevent that.
They actually have been trying a bunch of different schemes now, for the last six to eight months to try to rick foreign investors into investing more in China.
They even had Ray Dalio do like a promotional video about the Chinese economy.
Kyle Bass and Emma Muhleman have documented how the Chinese government is offering Wall Street high fees to funnel U.S. investor pension fund money into China.
Why would they need to block with capital controls and all this net capital outflows?
So I think Brent was right that it would happen. I think it's just already happened.
I'm not sure how much flight capital is left to come into the U.S. because I think we already had our blow-off stock market top in 2019.
If you look at the charts of some of these stocks like Boeing and the general stock market indexes, there was no fundamental reasons whatsoever for Boeing to go up over 3X in only a couple years.
Its fundamentals had no justification whatsoever for it.
Apple's stock, if you look at the chart there, from May 2019 up until before it crashed, I mean that was an enormous parabolic move.
So I think it's already happened.
George: Unlike Tesla that's just purely driven on fundamentals, obviously.
Jason Burack: Well, Tesla has its loyal shareholders who will buy and hold and buy more or buy the dips.
I think a lot of people now are turning bearish because they understand the earnings for these companies are going to be really, really bad.
So yes the Fed is trying to counteract with currency creation, more credit, bailout programs.
All these different things that they're doing, all these rules changes and bailout programs, which is pretty much all that's left for now, until the real economy is actually generating pre-global pandemic levels of cash flows, or anywhere near those levels.
And who knows how long it's going to be for that.
There's a really good YouTube channel that your listeners must watch, besides watching the documentary, China Hustle, that's a must-watch.
But the YouTube channel is China In Focus and they have unbelievable production value.
I don't know which money is backing them, but they've been documenting what's going on in China and it looks like there's a second wave with the global pandemic in China now outside of Wuhan.
This thing could go on, George, longer.
But the bottom line here is:
When the global economy, the U.S. economy is not generating cash flows, this means the Federal Reserve doesn’t have as much capital gains, tax revenues, and other tax revenues coming in.
So the federal government, state and local, and guess who has to fill the gap?
What WIll The Federal Reserve Do?
George: Yeah. So that takes me to my next question or topic of discussion here, and asking you:
How do you see this playing out over the next year or maybe five years?
To me, it just seems like if you understand that the Fed has to have asset prices stay inflated, they have to have debt continue to increase, and they have to maintain consumer confidence.
That's what everything is built on. Then everything that they're doing totally makes sense.
I know that watching even Real Vision and Macro Voices, sometimes you hear these guys that are 10 times smarter than I am, but they'll say that, “Oh, well, the Fed is doing this right now, and I don't think that they'll go this far.”
Like they won't go into the junk bond market. That's where they'll draw the line.
Or they won't do this, but from my standpoint just as the average Joe, I'm saying, “Well they're going to do everything.”
Because there's nothing they won't do because they're going to have to do that in order to continue to prop up those three things that I talked about earlier.
I don't see there being a limit to what they'll buy or what they'll backstop, and, therefore, their balance sheet going to who knows, $20, 30 trillion dollars?
I see the deficit of the federal government that's going to be at 20% of GDP, if we're lucky and then the Fed pegs the yield curve, so where does that take their balance sheet?
So my thought process, to take it a step further is:
At what point does the Fed own a good portion of the equity and the debt for the entire S&P 500?
Isn't that really taking us down the path of socialism?
And then you watched my digital currency video of course. So what are your thoughts on that?
Central banks by definition are already socialism. They're anti-capitalism and anti-free market.
So I would just talk about that.
But prior to the global pandemic George, I was in the stagflation, tax, and lie camp, so these governments, especially the U.S., thought that they could solely manage a devaluation of the dollar against the other currencies.
They could keep asset prices propped up so at least the Fed wouldn't have to fund everything.
So capital gains taxes for stocks, bonds, real estate would fund part of it, normal taxes on business activity inside the U.S. economy and companies doing business outside that got taxed here in the U.S., that they could get tax revenues on that.
The problem is that all that is offline.
I've seen projections that the U.S. government's going to be running a $5 trillion budget deficit for 2020, and that's just on the balance sheet.
The off-balance sheet stuff, we don't know the exact numbers because they don't use generally accepted accounting principles, so it's probably a lot more than that.
But all these other governments are doing it too.
So the currency markets are looking and seeing that all these governments are doing it and that's why there's the confusion.
And you have professional money managers that say, “Well I'm retreating into treasuries, well for now I'm retreating into dollars.”
I think personally the Fed is watching the dollar index, watching the trade-weighted dollar index, watching exchange rates and they're seeing what they can get away with.
What asset purchases that they can do to try to weaken the dollar and this is the game, it's going to be a cat and mouse game to try to prevent rules changes, bailouts, and new asset purchase programs.
Maybe buying debt, creating currency units to wipe away things, to try to prevent that dollar index rally from going to where Brent Johnson and Raoul Paul are saying.
The main problem though is the real economy, because now the real economy is not providing all those tax revenues that all the state and local governments and the federal government were counting on.
George: Okay, so when we talk about what's preventing the Fed from doing X, Y, or Z.
What is preventing them from just doing everything, from buying everything, from backstopping everything, from doing another 20 alphabet soup type of “solutions”?
I mean is inflation the only thing that's preventing them from doing that?
And is that even preventing them from doing it?
Technically I just interviewed Danielle DiMartino Booth on my channel. Not sure if you listened to that yet. But I asked her that point blank and she said that the Federal Reserve Act only says that the Fed is legally allowed to buy U.S. treasuries and also mortgage-backed securities. Everything else the Fed has done is illegal, it's a gray area, and it's a technicality that they haven't violated the law.
What they did do according to Danielle DiMartino Booth, in her own words, it was Enron.
They did off-balance sheet shenanigans and they created dummy corporations, these special purpose vehicles.
So the Fed is just financing these special purpose vehicles and the U.S. Treasury owns the assets. So the Fed doesn't directly, yet it's wink wink nod nod. It's ridiculous.
So this is a way around the legality because the Fed should have had to go to Congress, right, to get the rules changed?
But that would have taken too long and the asset prices would have fallen further and there would have been a lot more defaults than we have now, if the Fed had tried to do that, to go to Congress legally to get the rules changed.
George: Yeah that's my point.
They're just going to ignore whatever they need to ignore, or they're going to create some sort of makeshift temporary corporation, or LLC, or whatever they set up.
To do whatever they need to do to prop up asset bubbles and the confidence in the debt.
I don't see there being any law or rule, Federal Reserve Act, the Constitution, whatever you want to talk about, that will prevent them from doing this because at the end of the day, they'll just ignore it and do whatever they need to do.
What's the downside?
What authority is going to put the Fed in jail? You know what I'm saying?
Who is in charge of the Fed?
What if they do something wrong, even legally, do we have a way to prosecute them?
Jason Burack: No.
George: My guess would be absolutely not.
Jason Burack: No, not at all.
In fact, the Republicans for the last couple years were saying they wouldn't do MMT, but look what happened as soon as the asset prices fell.
As soon as their stock, bond and real estate portfolios, their own portfolios, the ones who didn't sit in those classified information meetings, in Senate intel hearings, in House intel hearings in late January, early February about the global pandemic who didn't sell their stocks right away.
Now their net worths are down too, so they're in favor of these to move up the prices of their assets back so they look on paper as rich.
I mean, let me just use a personal example. I love my parents but my parents don't agree with anything I said.
They didn't listen to my warnings about the oil market two months ago.
They were relying on income from commercial real estate mortgages in New York City that were successful investments for a while, for years.
So they were throwing a cash flow, but they didn't listen to anything I said and a lot of baby boomers, George, not all baby boomers, because I've gotten emails from baby boomers who said they're against this.
But a large amount of mainstream American baby boomers, Republican, Democrat, Independent, are in favor of higher asset prices.
That will help their retirement, that will make them look on paper as higher net worth. That's preventing harsh changes I think.
Of course, unfortunately, George, capitalism gets blamed for all this.
When I think you and me both agree that central banking is not free market or capitalism.
Does The Fed Have A Functioning Release Valve?
George: Yeah, exactly. It's like Jim Grant talking about the Fed being the arson and the firefighter.
It always goes back to that. As far as the stock market, we understand the Fed is just going to do everything that they need to, they're going to print as much money as they need to.
They're going to ignore any law, any Federal Reserve Act, they're going to ignore the Constitution.
Longterm, does that mean the release valve has to be the dollar?
If so, do asset prices just go up in nominal terms but potentially go down in inflation adjustment terms?
The release valve I think is currencies, it's not just the dollar, it's all the currencies. So there is no safe currency longterm. That's why I own gold and silver as insurance and wealth preservation and for savings. You can't save in these currencies.
Jason Burack: Now as far as asset prices go, we don't have enough data yet to see how the stock market is reacting to all these earnings.
So it's still early in the earnings season, I think the first earnings announcement was only a week or two ago.
We haven't had enough earnings announcements to see how each individual company in the S&P 500 or the Dow is reacting to all the earnings.
Because the earnings announcements are going to be brutal.
If you want to see hockey sticks, take a look at the Fed's official balance sheet along with the jobless rates.
George: Have you seen M2?
Jason Burack: Yeah, yeah. Peter Schiff's son actually put that on his Twitter, Spencer Schiff.
George: Yeah, the M2 is just staggering when you look at that.
I mean a trillion dollars in the last four weeks, that's just unbelievable.
Jason Burack: Here's the thing that most people are missing. Look what the Bank of Japan has just done in Japan, look what the European Central Bank has done.
Look what China's been doing for the last 12 months, and then also as the global pandemic was getting worse, I think they were creating hundreds of billions of dollars worth of bailout relief in just like a month or two.
It's all these governments doing it and this is distorting things enormously.
I think there's going to be a lot more volatility going forward. We're in a bear market rally now, but the major stock market indexes, and I predicted this for my Patreon account contributors behind the paywall a couple weeks ago.
While everything was still crashing, I said the Fed would … There's really nothing to stop them, would do more and more intervention and there would be some type of rally and who knows how long it's going to last.
But then the earnings are going to come out from these companies, and people are going to start to look at it and the jobless claims are going to be brutal, and people are going to start wondering that it's only the Fed, what the Fed is doing.
The Fed is getting exposed. More people who didn't question the Fed in the past are starting to question the Fed now, which is good.
Unfortunately, a lot of people who own assets are not asking the right questions yet, so they are questioning the Fed but a lot of them still want the asset prices higher and they would prefer the asset prices higher.
Is The Fed Really Disguising All These Bailouts?
George: Yeah, for sure. A lot of the experts I've talked to always question the political willpower to have the Fed bailout whomever.
Whether it's foreign central banks, whether it's big corporations, but unfortunately I just don't know that the average Joe really cares enough to come out on the street with a pitchfork.
Do you disagree with that? Do you agree with that?
In other words, the Fed comes out and they bail out Boeing, or they bail out all these corporations.
They just don't let anyone fail. Meanwhile people are stuck at home without a paycheck, having a hard time making ends meet, and they're saying, “What the hell is going on?”
I think if the Fed disguises all of these bailouts with these four-letter acronyms or abbreviations, then the average Joe isn't even going to know the Fed's bailing out Wall Street, or any of these other countries or central banks.
What do you think about that?
Jason Burack: Yeah, normally unfortunately a lot of the narrative in mainstream America still blame capitalism.
George: Yeah right.
Jason Burack: So the Fed gets away with it. Congress, both political parties.
There's a $500 billion leverage bailout slush fund for large corporations that don't deserve this to go and take advantage of small and medium-sized businesses that are temporarily distressed and buy those assets for pennies.
It's absolutely horrible, there's no need for it whatsoever and yet it was given because all these companies are lobbying Congress on both sides of the aisle.
I really think that a lot of people don't understand … A lot of people don't even know what the Fed is.
They can't name the Fed chairman, so they don't know and that's part of the problem.
People just see, “Oh the Fed controls interest rates.” The Fed is very ambiguous and that's what the Fed wants.
George: Yeah, I think that's why they name all these programs such crazy acronyms that no one's going to remember.
Not even the private dealer … What is it, the private dealer credit facility or funding facility.
I mean no one in the average Main Street is going to even care what that means or be able to connect those dots unless they're watching your videos or watching my videos.
Well, all right. I'm trying to think of a way to end this on a positive note, buddy. What do you think?
Jason Burack: I have a positive for you.
George: Okay, great, and then also, I know my viewers will be just super pissed if I don't ask you about gold.
I know you really take a deep dive into not only gold and the oil markets and the producers.
So I'd love to get your opinion on that quickly as well.
The major positive is in crisis, there is opportunity.
People have a lot of free time.
Some people may never have this much free time again, so there is a lot of opportunity now for someone to go and learn new skills, whether that's YouTube videos, podcasts like yours and mine, audiobooks, Skillshare, MasterClass. Obviously not Paul Krugman's MasterClass.
George: We live in strange times. How many times have you heard that lately?
Jason Burack: That guy's like Jim Cramer. He's getting paid very high amounts of money to be a disinformation agent.
So yeah, there's the opportunity there. Instead of watching … Okay, watching Netflix is fine once in a while, watching some TV fine.
Maybe doing fun things on the computer, playing video games or something online is okay once in a while.
But there is a ton of free time here to be an entrepreneur, to have a side hustle, to figure out with your friends and family new skills, new business opportunities.
You have the internet still and figure out how to make a little bit more money, build a side business now, maybe a little extra cash flow.
And maybe in a year or two, when hopefully things are somewhat back to normal, you have the chance to have an extra thousand or two thousand a month coming in.
With me, my tiny little small online business, actually it's never been better in the last five or six months.
George: Yeah, that's good.
I was going to totally use you as an example with your Patreon and your little side hustle.
You're not a Ph.D. economist, this is something you're self-taught just like me, and bam, you got the financial freedom to go out there and kind of take charge of your destiny and do what you want which is really study macro.
That's a great example.
Jason Burack: Yes, and also look at the fundamentals of companies. I worked as you know, day jobs for investment analysts and I was made fun of all the time for liking gold.
I was teased relentlessly for liking gold and meanwhile, I think at the company I used to work at, my day job there, I recommended …
This was when I was an investment analyst so I was allowed to give recommendations, just getting my opinion out. But I recommended Franco-Nevada.
This was 2013, it was like $40.00 a share. Now it's like $118.00 a share and dividends have increased every year.
I think that's the best stock pick, one of the best stock picks that that company has ever had and I think they deleted all my articles from the website now.
where do you see gold going and a time horizon?
George: All right, so let's step into that quickly Jason.
What do you think about gold?
I just saw the CEO I think on Real Vision, for Franco-Nevada if I'm not mistaken, and I know that's a company you really like and liked them for a long time.
So where do you see gold going and a time horizon?
Maybe short-term, long-term, and then what type of companies do you really like?
The juniors, maybe some of the bigger players?
Jason Burack: I avoid the juniors because a lot of the juniors right now, it's all about capital raising and a lot of the juniors don't have a cash on the balance sheet.
When gold prices were higher, before they crashed briefly, some of the juniors were able to raise a year or two worth of capital to do a drilling program.
But, according to Nolan Watson at Sandstorm Gold who helps finance a lot of these companies.
Sandstorm Gold Royalties Provides Asset Update, Reports 85.3 Metres of 84.3 g/t Gold and 6.8% Copper at Hod Maden Main Zone. https://t.co/81D6ly0ice
— Sandstorm Gold Royalties (@sandstormSSL) May 14, 2020
He does a royalty and streaming company, so Franco-Nevada and Sandstorm Gold do not mine.
Their business model George, I know you're a real estate investor, is actually very similar to a rental property owner.
So they just finance some of these either new gold mines that are about to be built or under construction, or they help repair the balance sheet of a producing miner for gold, silver or copper, and then in exchange for that, they just get a new stream of cash flow.
They get a small amount of each company or mine's revenue. It's normally less than 8% of each mine.
Some of these royalties are only like 1% or 2% of annual revenue, and these things add up.
They allow for a lot more of a diversified high margin cash flow business because gold mining is so dangerous.
Now I think gold mining will be making good money once the miners are probably back online in four to six weeks.
Four to six weeks, I think more mines will be online. At least 30% of all the global gold, silver, and copper mines are offline right now with the global pandemic.
So I think those will come back online, but with the low oil prices, which I was warning people about the oil market collapsing two months ago and a lot of people didn't listen to me.
With these low oil prices, the gold miners, unless there are problems at a specific mine or the management teams are bad, or some of these governments maybe get greedy now with taxing some of them, the overall, industry-wide overall, should have, potentially, the best margins in history for the gold miners.
George: Because a lot of their costs are associated with energy.
Jason Burack: Bingo, and also weaker currencies.
There's a lot of mines in emerging markets, so the weaker currencies normally mean lower labor costs.
Basically yes. Yes. Now the miners are riskier because there are so many things that can go wrong at a mine. It's very capital intensive.
There is not consistent free cash flow throughout all the cycle.
So that's why the majority of my investment money is in royalty and streaming companies because these companies already have diversified sources of cash flow from royalties and streams.
They're earning small amounts of cash flow from … In Franco-Nevada's case, it's over 100 assets online generating cash flow and Sandstorm Gold, it's over 20.
When you're talking about the royalty streams, this might be a stupid question, but is that based on the net or the gross?
Jason Burack: For the royalties, their NSR, net smelter royalties. So they're called NSRs but it's I think at a gross revenue because the royalties are paid first.
George: It's like a franchise fee where you own a McDonald's, if you're the franchisor and you're getting 10% of whatever their gross sales are.
Who Is Franco-Nevada?
Jason Burack: They just collect checks, and then they reinvest it.
So either with Franco-Nevada, they're paying more dividends, or they're reinvesting into more growth. These are cash flow machines.
Franco-Nevada is one of the only businesses listed on a publicly-traded stock exchange, and people always complain about how Franco-Nevada is too expensive, the PE ratio is too high.
I've been hearing this for years. I was hearing this when the stock was at $30.00 a share, $40.00 a share, $50.00 a share, $60.00 a share.
Anyone who looks at the company sees that, looks at the PE price to earnings ratio and it's very misleading because they're still growing.
They're taking those cash flows, with high gross margins and it's a fairly pure free cash flow business unless management over-leverages the balance sheet or has some bad deals to write off and they're reinvesting that into more growth.
Once those new cash flows come online, that means larger future dividends.
George: It would seem to me , by just hearing you talk about this, as far as their business model …
It's almost like they don't even have any admin costs. Like you could run that entire business with like 10 people.
Jason Burack: Bingo.
George: Then your whole cost is just whatever you borrow, whatever leverage you use, to give to these miners to basically buy that revenue stream in the future, and so you got all this diversification, you got let's say 100 deals out there.
So even five or six of those deals go bust, who cares because you're getting such a high percentage and then your overhead is almost zero.
Jason Burack: Exactly, exactly. So you have Franco-Nevada which has I think a little over 40 employees and their revenue per employee is high or higher than Goldman-Sachs, revenue per employee.
I think they had, the last time I looked at the stock I think it had a $16 billion market cap give or take.
So they're making over $600 million per year in cash flow. Mostly pure or free cash flow.
They've increased dividends, I think every year since they re-IPOed in 2007 so this is a very good business. It's almost never cheap though.
That's the thing, so it is still a growth business.
They're not growing as quickly as they used to but I think there's going to be a lot more opportunities after things restart because the copper miners are in serious, serious trouble.
Once things restart, I think there's going to be a lot more deals for these firms, these larger precious metal royalty and streaming companies with the copper miners who are going to need capital infusions that is not available in the equity markets.
They're going to need to do streaming deals on gold or silver streams.
George: Got it.
So Franco-Nevada is not just gold? They go into copper as well and silver, I assume?
Jason Burack: So Franco-Nevada, they do deals with copper miners, but they're for gold streams or silver streams.
So streams are a little bit different than royalties. I don't want to go into all the details, I save that for patrons. Also it's available on the Franco-Nevada website.
They have all the terms that explain the contracts differently, but Franco-Nevada, the majority of their revenues are related to gold and silver so streams or royalties in those.
So 80% of their annual revenues are from gold and silver and then they have a 20% oil and gas royalty portfolio.
They were actually minting money, minting currency, off of the shale oil bubble so they had all these royalties that were paying out enormous gains for years off their oil and gas royalties because the more these shale companies drilled, the more they made.
Now they may take a hit on that in the short-term, but I suspect that they will probably do some more deals for growth on the gold and silverside.
So I don't think the company is in any jeopardy of going bankrupt.
They don't leverage their balance sheet with debt, but their oil and gas royalty revenues could cause a little short-term headwinds.
The stock did crash, I think from $115.00 a share down to like $85.00 but I think that was a buying opportunity at $85.00 a couple weeks ago.
Now it's back up, I think it's $120.00. It might be around $120.00 in the last couple of days.
George: All right buddy. Well I want to be cognizant of your time. That was just a fantastic conversation. Really, really opened up my mind.
So for my viewers who want to find out more about what you do or go to your Patreon or your YouTube or I know you're super active on Twitter, how can they find out more information about what you do?
Jason Burack: So YouTube channel, WallStForMainSt. I don't have anything on my website right now.
I need to do some more work on that. I do have …
I'm only charging $5.00 a month for the content behind the paywall. A lot of people in their own words, not mine have said it's one of the best values out there.
There are paid newsletters that charge like $80.00 or more that have less good research work and content. There are audio podcasts, for example. I did an audio podcast.
I think it was either the end of January or the first week of February and it was an oil market podcast.
For Patreons behind the paywall there, going through in detail problems with the oil market and many different companies, including how the highest cost, most indebted shale oil producers in the [inaudible 01:09:31], if the oil price went lower, they would go bankrupt.
It wasn't rocket science, it was just good, hard work research analysis, predicting that if the oil price continued to go lower, the higher cost, most indebted oil companies would go bankrupt first and that's what happened in the last 10 days with Whiting Petroleum.
So that company was predicted to go bankrupt over two months ago.
There's a lot of other articles there about gold mining stocks, silver mining stocks, royalty and streaming companies, trading volatility, technical analysis, and fundamental problems with some of these consumer staple stocks.
George: Fantastic. Fantastic. Okay, and what's your Patreon page, Jason? It is just your name?
Jason Burack: Patreon.com/wallstformainst. I think that's all of it.
George: Okay. Yeah guys, if you enjoy my channel or what I do, my content, you're going to absolutely love what Jason does. So check out his YouTube channel for sure.
Check him out on Twitter and then if you're interested, definitely go to his Patreon page.
And consider subscribing there because he really gets into the nitty-gritty on all of these things that we're not only concerned with, but the opportunities that may present themselves with what's happening here in the Cerveza sickness pandemic.
So, Jason, thanks buddy for your time. I cannot wait to do it again.
Jason Burack: I really enjoyed this George. You're doing an amazing job.
Your channel is I think the fastest growing in our space. Congratulations.